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The costs and benefits of China’s Belt and Road Initiative

Chinese President Xi Jinping speaks during a news conference at the Belt and Road Forum, at the International Conference Center in Yanqi Lake, north of Beijing, on May 15, 2017. Source: Jason Lee/AFP

IN two steps in 2013, first in Kazakhstan and then in Indonesia, Chinese President Xi Jinping launched what is now known as the ‘Belt and Road Initiative’ (BRI). Among confusion as to the dynamic form and intent of the BRI, and the fundamental priority within China of maintaining growth and delivering moderate prosperity to all Chinese citizens, the big question for many is what, economically, is in it for China?

December 2018 marks four decades since Deng Xiaoping launched the ‘reform and opening’ era. That era instigated China’s shift to becoming the world’s second-largest economy and helped some 800 million people escape poverty.

It was a process characterised by the incremental transfer of informal rural labour into primary urban and industrial labour, alongside concentrated investment in fixed capital and the energy-intensive industrial and export-oriented sectors in general.

The Chinese economy has undergone four decades of structural change, resulting in a greater role for consumption, increased independent innovation capacity, and the now fast-development of service industries in the country.

Consequently, several coastal and municipal provinces in China already enjoy high per capita incomes. In China’s central and western regions, however, absolute poverty remains an issue. The services sector is rapidly developing, but the financial sector and the internationalisation of China’s currency, the Renminbi (RMB), lag behind the maturity and size of China’s economy and international integration.

The BRI emphasises cooperation in five areas: coordinating development policies; forging infrastructure and facilities networks; strengthening investment and trade relations; enhancing financial cooperation; and deepening social and cultural exchange.

With such a breadth of goals and dozens of countries officially signed up to the BRI, it is hard enough to understand its current form, let alone predict its future trajectory.

One approach, however, is to understand China’s economic needs in terms of realising its goal of comprehensive moderate prosperity, and also to look at the precedent of Chinese policy-making over recent decades. That is the aim of my recent article in the Asia & the Pacific Policy Studiesjournal, ‘The Belt and Road Initiative: What’s in it for China?’

The BRI’s launch sites and geographic emphasis link to both China’s history and the logic of economic geography. To that end, the ‘Belt’ is understood as referring to China’s historical trade partners along the Eurasian continent, and the ‘Road’ more to developing countries in Asia and Africa, but especially coastal developing countries of the Indo-Pacific Rim.

Historically, China had significant ties with Eurasia along the original Silk Road. The fleets of Zheng He, a Ming Dynasty mariner, targeted Southeast and South Asian countries alongside East Africa. In particular, Zheng He is known to have landed on the coast of modern-day Kenya and to have visited Sri Lanka several times.

In light of China’s now rapidly ageing population, the ‘Road’ offers the potential for a period of growth driven by the demographic dividend of the developing world – its proportionately large working-age population, standard household accumulation levels, and favourable development patterns.

Finally, the BRI’s economic geography is also important. Node partner countries such as Kenya have an important role to play, possibly akin to the role played by provinces like Jiangsu and Zhejiang in China’s own development.

In particular, these partner countries often host important ports, allowing the BRI to play a role facilitating and encouraging connectivity between coastal trade hubs and respective sub-regions.

A case in point is the Standard Gauge railway that links to Kenya’s important trade port city of Mombasa and is incrementally being connected not only across major cities in Kenya, but also to neighbouring landlocked countries. Another example is the industrial zone and port in Bagamoyo, Tanzania: Tanzania shares borders with eight countries, most of which are landlocked.

(File) Chinese President Xi Jinping shakes hands with Kenyan President Uhuru Kenyatta prior to their bilateral meeting during the Belt and Road Forum for International Cooperation at the Great Hall of the People in Beijing, China May 15, 2017. Source: Reuters/Etienne Oliveau

For China, prioritising links with neighbour countries to its west, as well as countries to its southeast such as Burma (Myanmar), also opens up the prospect of new economic corridors between coastal China and China’s own poorer economic hinterland. To the extent that this helps to reduce poverty in these regions and facilitates the development of China’s neighbourhood, it will be celebrated as one of the BRI’s ‘win-win’ achievements.

China’s approach to supporting the financing of such major infrastructure projects is conceptualised as ‘patient capital’. In essence, this refers to innovative development finance mechanisms such as the Silk Road Fund and the Asian Infrastructure Investment Fund.

This approach offers developing countries new and needed sources of development finance, but also confronts a number of high barriers, including the potential clash of different political regimes and different approaches to due diligence.

For China, funding or co-funding such infrastructure opens not only doors for Chinese companies and related downstream industries, but also opportunities to develop international and domestic finance and investment.

Since the 2008 financial crisis, China’s foreign exchange savings have been exposed to often negative real interest returns, especially when expected exchange rate movements are accounted for. In response, China policymakers have rolled out a variety of initiatives to foster use of the RMB abroad, while identifying links between China’s outbound investments and the internationalisation of China’s own banking sector.

China’s e-commerce giants are also playing a role, with China’s most prominent e-commerce billionaire, Jack Ma, fostering direct exchange between Chinese and African e-commerce entrepreneurs and promoting the use of e-commerce in BRI countries.

In the absence of well-developed physical infrastructure in many poor countries, this also opens up modern means of rapidly facilitating market integration for remote communities, farmers, and informal traders.

Deng Xiaoping once described China’s experimental reform process as “crossing the river by feeling the stones.” Amid maturing economic conditions and demographic transition, the BRI is something of an “innovative and pragmatic” response to this process, and one that seeks to support win-win economic development.

While some of the potential and timely ‘wins’ for China are obvious, the integration of China’s outbound investment and development assistance in developing countries would be well-served by more research.

This piece was first published on Policy Forum, Asia and the Pacific’s platform for public policy analysis and opinion.

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